A mortgage loan is one which is taken from banks, private mortgage brokers or online brokers. These loans are taken by pledging owned property in order to buy another residential or commercial property. They are sometimes taken to even refinance another loan. Mortgage loans generally extend over a period of 15 to 30 years. The payment amounts are distributed depending on the exact number of years, the type of mortgage and the decided rate of interest. The property that is purchased serves as security in case of a debt. In case the borrower defaults, in terms of the payments, the lender can sell the property by using the foreclosure process.

In order to be sure that the borrower can make the payments, there are a few key points that lenders examine beforehand. The main aspects considered are the down payment, monthly income and the credit score of the borrower. The down payment amount bring the risk of the lender down in case of defaults, the monthly income will reflect the borrowers capability to make monthly payments and the credit scores show the risks of lending to the borrower. Higher the credit score lower the risk for the loan.

Types of loans

• Interest-only mortgage: This type of a mortgage loan requires the borrower to pay only interest for a specified time period. After this period the loan is usually changed and there is a new mortgage amount. This new amount will be repaid with principal payments plus the left over interest amounts.

• Balloon mortgage: This mortgage gives the borrowers a lower rate for a fixed period. The period usually varies between 3 to 10 years. Once this fixed period passes, the borrower has to pay the entire principal amount.

• Sub-prime mortgage: A sub-prime mortgage is meant for people whose credit score is low. This means the risk for the lender is higher. In order to compensate for this, the interest rate and monthly payments are also higher. Lenders usually earn good money by giving out these loans. But if the borrower pays the due amount before the time expected, a prepayment penalty has to be paid by the lender.

• Fixed rate mortgage: These mortgage loans have a fixed rate over the loan period. They are very popular as rises and falls in interest rates do not influence these rates. No matter what, the interest rates remain the same in these mortgages.

• Home equity line of credit: These are also known as HELOC’s. The mortgage rates are variable in line with the prime rate. This lasts for 3 to 10 years after which the borrower is required to pay back the entire principal amount like in balloon mortgages.

• Adjustable mortgages: This is a mortgage loan where there is a fixed rate for a specific time period. After completion of this time period the rate of interest is adjusted according to the fluctuating market rates. These loans are the most commonly taken loans after fixed rate mortgage loans.

In today’s market, subprime mortgage loans – high-risk mortgages that charge a higher interest rate in order to compensate for a borrower’s blemished credit record – often seem to be the only choice for someone with a low credit score or late payments who is looking for mortgage solutions. The truth is that there are programs in place that are offered by certain lenders that give this type of borrower another option. One such option, an Alt-A loan program, gives borrowers with less-than-perfect credit scores a chance to take advantage of many of the benefits that are offered to those who do qualify for the standard “prime” loan.

What are Subprime Mortgage Loans?

Subprime mortgage loans may at first seem like an appealing option to a borrower. He may have previously been told that he did not qualify for a mortgage at all, closing the door to his dream of becoming a homeowner. In some instances, he may then turn to a subprime lender, who can offer a way for him to achieve his goal after all. Subprime mortgage loans were created to give borrowers who may be considered “high risk” an opportunity to own a home. However, many subprime lenders are of the philosophy “Do Less, Make More.” They are simply out to sell their product, and they either can’t or won’t offer the borrower another option, even though other alternative mortgages do exist.

While subprime mortgage loans are offered to borrowers who may have what are considered to be red flags on their credit report, they bring many negatives to the table. Because they are high-risk mortgages, they have higher interest rates and higher closing costs that compensate the lender for its perceived risk in taking on this type of borrower. In addition, many borrowers of subprime mortgage loans will find, when it is time to pay taxes or insurance on their property, that they do not have an escrow account where funds are accrued to pay these items. You would think that a loan made to a person that has shown an inability to make payments on time and handle their finances prudently would mandate escrow accounts. The borrowers may find that they must refinance their loan in order to cover those taxes or insurance. However, prepayment penalties are customary on such high-risk mortgages, leaving a borrower in this scenario in more debt than when he started the process.

In addition, lenders offering such high-risk mortgages will typically not agree to a locked-in price until the day of the closing. This means that the borrower loses out on price protection against the market and may wind up being forced to pay an even higher interest rate on their subprime mortgage loans than was previously discussed.

An Alt-A Loan Program: The Alternative to Subprime Mortgage Loans

So are there other options for borrowers with problematic credit histories beyond subprime mortgage loans? Yes – and one such option is an Alt-A loan program. This alternative to other high-risk mortgages is offered by many lenders and can give certain borrowers another choice when seeking mortgage solutions. Borrowers with a credit score of 600 to 660, who may have a late payment or two in their history, and who have a debt ratio of around 50% (where standard loans require 40%), are likely to be eligible for this type of program.

With an Alt-A loan program, unlike other high-risk mortgages, prepayment penalties are not mandatory, leaving open the ability to refinance more easily at a later time. Lower interest rates than those offered by a subprime lender are available to borrowers, and closing costs are typically lower than subprime loans as well. Even better for the borrower, an Alt-A loan program offers a wider range of payment stream options, from interest-only loans to 40-year terms to buy downs, which can enable the borrower to buy a bigger house than he or she previously thought possible.

Plus, a lender offering an Alt-A loan program will normally offer a longer guaranteed lock period and will even put the rate in writing for a certain period of time. This allows borrowers to know up front just to what they are committing. This can make a very big difference throughout the term of the mortgage, particularly if the borrower does need to refinance at some point in the future, and makes this a better option than subprime mortgage loans and other high-risk mortgages.

Choosing a Lender for Alt-A Mortgages

It is critical to work with a full-service lender that offers a wide range of diverse mortgage solutions, including Alt-A mortgages, rather than one that specializes in just prime or just subprime mortgage loans. This way, borrowers can be sure that they are offered the program that is best for their needs, not the program that is best for the lender’s needs. In addition, before committing to working with any lender, the borrower and the mortgage broker should both feel confident that the lender has the resources and the knowledge to answer all questions about alternative mortgages and handle all concerns.

Above all, borrowers should never feel pressured into choosing subprime mortgage loans simply because of their credit history. They should instead be made aware of all of the programs that exist. While subprime mortgage loans may turn out to be a borrower’s best bet for home ownership, he or she should be able to make that decision comfortably after exploring all other options for high-risk mortgages. And by understanding the benefits of an Alt-A loan program, borrowers may find that in fact they can have a mortgage with a better interest rate and better protections than previously thought possible.

If you have been looking into getting a reverse mortgage, then undoubtedly you have heard that one of the negatives repeatedly cited is that the costs are high. On the surface this seems to be a true statement. However, if you start dissecting the costs of a reverse mortgage and compare those costs to alternatives like selling your home and moving, you may find that the costs are only high if you have other assets or sources of income to access other than your home. If you truly need a reverse mortgage in order to make ends meet or for other financial reasons, then you may realize that the costs are not too high given your particular circumstances.

Lets take a closer look at what the real costs of a reverse mortgage are and what these costs pay for.

The majority of reverse mortgage loans that have closed in the United States to date, have been the FHA insured HECM (Home Equity Conversion Mortgage.) Because these loans are insured by FHA and backed by HUD they are considered to be the safest reverse mortgage loans available and usually offer the most benefits and more choices of how you can elect to receive your loan proceeds.

The guarantees that you receive with the FHA insured HECM reverse mortgage loan are:

1. Under the tenure option you will continue to receive your monthly payments from your reverse mortgage as long as you live in your home. That means that even if you outlive your life expectancy and your house is not worth as much as your reverse mortgage has paid you, you will continue to receive those payments, until you permanently leave your home. Guaranteed!

2. Your heirs or your estate will NEVER owe more on the loan than the value of your home at the time the loan is repaid. Reverse Mortgage loans are non-recourse loans. The lender can never come back to your estate or your heirs if there is a shortfall at the time of repayment.

3. Additionally, if the lender should happen to go out of business, the FHA insurance guarantees that you will continue to receive your monthly payments or have access to your credit line in accordance with the terms of your original loan agreement.

If the FHA mortgage insurance was not available, you can be sure that there would be very few lenders willing to make reverse mortgage loans with the favorable terms that are offered to seniors today.

The cost of the FHA insurance premium is 2% of the loan amount. The insurance premium along with other closing costs are rolled into the loan. They are not upfront out of pocket expenses, they are simply paid by you or your estate at the time the loan is repaid.

Loan Servicing Fee:

A monthly loan servicing fee of up to $35.00 per month is charged to the borrower as part of the overall closing costs. All lenders charge a loan servicing fee. However, on a forward mortgage the loan servicing fee is incorporated into the interest rate on the loan, so the borrower often times isn’t even aware of it.

On a Reverse mortgage the servicing fee is set aside upfront and is calculated based upon the life expectancy of the youngest borrower. The lender receives the servicing fee each month as long as the loan is in force. If the borrower leaves the home permanently before the servicing set aside is exhausted, the balance remaining is distributed to the borrower or the borrowers’ estate.

Loan Origination Fee:

The loan origination fee is the fee that is charged by the lender to originate, process and close your reverse mortgage loan application. FHA caps the loan origination fee at 2% of the value of the house or the maximum FHA loan limit for your geographical area, whichever is less. FHA also states that the origination fee in any case is not to be less than $2000. (At the time of this writing, Congress and HUD are discussing changes to this mandate.) Some lenders have been known to negotiate the loan origination fee to compete for business.

The three fees mentioned above make up the lions’ share of the closing costs for a reverse mortgage. In addition to these three, you will have costs that you are familiar with from previous mortgages that you have had. They are fees such as, appraisal, credit report, flood certification, courier, recording, document preparation, pest inspection, closing or escrow fee, title insurance, survey. (This may or may not be a complete list, depending on your area of the country.)

So Are The Costs Really Too High? – You Decide

It is best to view the costs in comparison to the value that you will receive from the benefits of getting a reverse mortgage. You must evaluate the costs compared to the improvement in your lifestyle, your increased monthly income, and the fact that you are not burdening your children at this time in your life. Personally you will not feel the impact of the closing costs. They are simply a cost from your estate at the time your house is sold or refinanced and the loan is paid off. It is foolhardy to reject the idea of getting a reverse mortgage based strictly on the cost of this valuable financial planning tool.

After all, if you considered one of the obvious alternatives, which would be to sell your home, you would be looking at paying 6% in real estate commissions as well as typical sellers’ closing costs and possibly some costly home

repairs. You would then have relocation costs for yourself which could include a down payment of 5% – 20% for another home, moving expenses of $5,000. or more and closing costs of 2% – 3% for a new mortgage. As you can see the cost of selling your home far outweighs the cost of obtaining a reverse mortgage.

A Word of Caution:

Now that you know that the costs for a reverse mortgage do tend to be higher than the costs of a traditional forward mortgage, hopefully you also have an appreciation for why they are high. That being said, you probably are not a candidate for a reverse mortgage if you anticipate permanently leaving your home in less than five years. Five years seems to be the consensus among industry experts, to be the critical time frame to remain in your home to make the costs worthwhile. If you feel you will leave your home sooner than five years, you should consider alternative options, such as a cash out refinance or a home equity loan to tide you over until you sell or move out of your home.